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#2190 signed 12-21-95

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

In re:

KARLA A. BREITLING,

DEBTOR

CHAPTER 7

CASE NO. 95-40190-7

KARLA A. BREITLING,

PLAINTIFF,

v.

JOHNSON COUNTY COMMUNITY COLLEGE,

STUDENT LOAN MARKETING ASS'N,

UNITED STUDENT AID FUNDS,

U.S. DEPARTMENT OF EDUCATION

DEFENDANTS

ADV. NO. 95-7060

ORDER GRANTING MOTION TO FILE ANSWER OUT OF TIME

This proceeding is before the Court on the motion of defendant Student Loan Marketing Association, better known as Sallie Mae, to answer the debtor's complaint out of time. Sallie Mae appears by counsel Sonya S. Stokes. The debtor appears by counsel Douglas E. Wood and Mark Rohrbaugh. The Court has reviewed the relevant materials and is now ready to rule.

The following facts are uncontroverted. On May 5, 1995, the debtor filed her complaint seeking a hardship discharge of her student loan debts. Sallie Mae received a summons and complaint and forwarded them to EduServ Technologies, a guarantor entity it believed would defend the suit. The United States Department of Education filed its answer on June 7 and Johnson County Community College filed its answer on August 1. United Student Aid Funds filed a motion to be joined as an additional defendant because it was the holder some of the loans the debtor wished to discharge; the motion was granted and United Student Aid Funds filed its answer on September 15. On June 20, EduServ apparently mailed a letter to the Clerk of the Court (including the number for the main case but not for this adversary proceeding), with a copy to the debtor's counsel, and stated it would not be responding to the summons because when it bought the debtor's loan, "there was no liability on this claim as it was deemed uninsured." However, EduServ did not inform Sallie Mae of its decision not to defend the suit until it sent Sallie Mae a letter dated October 3. Sallie Mae sent its counsel a letter on October 16, asking her to review the matter and determine Sallie Mae's most effective course of action. Sallie Mae's motion to file its answer out of time was filed on November 13. In conclusory language, the debtor objects that Sallie Mae's neglect is inexcusable and that granting the motion would substantially prejudice her.

The debtor and the other three appearing defendants submitted a "Report of Parties' Planning Meeting," modified in certain respects at a pretrial conference on November 30, indicating they had agreed to conclude discovery by January 30, 1996, and exchange final lists of witnesses and exhibits by February 1. Sallie Mae has agreed to be bound by this schedule if its motion is granted.

DISCUSSION AND CONCLUSIONS

Federal Rule of Bankruptcy Procedure 7012(a) specifies the time for filing an answer to a complaint, a deadline Sallie Mae concedes it missed. Rule 9006(b)(1) provides that a motion made under the circumstances present here may be granted if the movant's failure to act was the result of "excusable neglect." In Pioneer Investment Services v. Brunswick Associates, ___ U.S. ___, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993), the Supreme Court considered the meaning of that phrase in Rule 9006(b)(1). Initially, the Court quoted an ordinary meaning of "neglect" from Webster's Ninth New Collegiate Dictionary 791 (1983): "'to leave undone or unattended to, esp[ecially] through carelessness.'" 123 L.Ed.2d at 85. Thus, the Court explained, "neglect" encompasses both faultless omissions to act and omissions caused by carelessness. 123 L.Ed.2d at 85. Certainly, situations where neglect is caused by an accident, ill health, incarceration, or an act of God will usually, if not always, be held to be excusable. This leaves the more difficult question of what omissions caused by carelessness are excusable. In these situations, the Supreme Court held that the determination is an equitable one, taking into account all relevant circumstances surrounding the omission. Relevant circumstances include "the danger of prejudice to the debtor, the length of the delay and its potential impact on judicial proceedings, the reason for the delay, including whether it was within the reasonable control of the movant, and whether the movant acted in good faith." 123 L.Ed.2d at 89-90. However, the neglect of both the movant and the movant's counsel must be excusable, because the client is accountable for the acts and omissions of chosen counsel. 123 L.Ed.2d at 90-91.

The debtor has not indicated how she would be prejudiced if Sallie Mae is allowed to file its answer. Loss of the benefits gained through the moving party's default cannot constitute prejudice under the excusable neglect standard, or else prejudice would always exist. Instead, the debtor would have to show, for example, that Sallie Mae's delay somehow reduced her ability to pursue her claim against it, or that she somehow reasonably changed her position in reliance on its default. In fact, however, the debtor will have to make the same showing to discharge Sallie Mae's claim as she will to discharge those of the nondefaulting defendants. Furthermore, the Tenth Circuit has indicated that default judgments should be available only when the adversary process has been halted by "an essentially unresponsive party." Cessna Finance Corp. v. Bielenberg Masonry Contracting, Inc., 715 F.2d 1442, 1444 (1983). Many courts have indicated a great preference to have matters decided on the merits rather than by default, e.g., Gulley v. Orr, 905 F.2d 1383, 1386 (10th Cir. 1990), especially when large amounts of money are involved, Hutton v. Fisher, 359 F.2d 913, 916 (3d Cir. 1966). In short, the Court must conclude no prejudice exists here.

The rest of the circumstances indicate Sallie Mae's motion should be granted. Sallie Mae did not simply ignore the debtor's complaint, but, rightly or wrongly, passed it on to another entity to defend. It would not be equitable to punish Sallie Mae for EduServ's delay in returning the complaint to Sallie Mae. While the delay in responding to the complaint was quite lengthy, so long as Sallie Mae complies with the schedule agreed to by the other parties, as it has promised to do, the ultimate resolution of this proceeding will not have been delayed.

Under all the circumstances, the Court concludes Sallie Mae's motion to file its answer out of time should be and it is hereby granted.

IT IS SO ORDERED.

Dated at Topeka, Kansas, this 21st day of December, 1995.











__________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

 

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